Ailing U.S. Postal Service Tries to Avoid Twinkie’s Fate

By Angela Greiling Keane -
Nov 27, 2012

While the Hostess Twinkie may not be as central to the U.S. economy as the mail, Postmaster General Patrick Donahoe sees uncomfortable parallels of iconic products within unworkable organizational structures.

“Companies and industries have gone over their own fiscal cliff because they can’t sit down and work out their differences,” Donahoe said in an interview last week. “Like Hostess.”

Like Hostess Brands Inc., where a labor impasse prompted the snack-food maker’s liquidation, the Postal Service, with 28 times Hostess’s workforce of 18,000, has been squeezed by labor costs and changing consumer tastes to the brink of extinction. The post office’s insolvency is less imminent while no less ominous, with Donahoe projecting that the service expects to run out of cash in October without intervention from Congress.

“They’re in a box,” said Gene Del Polito, president of the Association for Postal Commerce, which represents mailers including Williams-Sonoma Inc. (WSM) and JPMorgan Chase & Co. “There’s no way out unless Congress is willing to get rid of the box. Just about every option they need to explore to reinvigorate themselves as a viable enterprise aren’t available to them.”

Turnaround specialists would be full of easy answers if the service were a private-sector company. The Postal Service is supposed to make a profit while operating as a government agency overseen by lawmakers who derive their authority over postal operations from the U.S. Constitution.

Four Days

“We in the turnaround business tend to think in terms of lead times gives you alternatives,” said Foster Finley, a managing director at AlixPartners LLP, a financial advisory firm. “When you’ve run out of lead time and you’ve gone from stressed to distressed to crisis, the bad thing is you’ve run out of options.”

Unlike a private enterprise, the Postal Service can’t close most locations even if they’re unprofitable. It can’t raise prices on its primary product by more than the inflation rate or change its pension or health benefits. And as of Sept. 28, when it exhausted its $15 billion borrowing limit with the U.S. Treasury, it can’t borrow any more money.

The U.S. Postal Service is running with no more than four days of operating cash on hand.

Labor costs have grown to 80 percent of expenses, even after 280,000 jobs were cut since 2000, as mail volume has dropped 26 percent from its peak six years ago.

Flat-Rate Boxes

The service has asked Congress to relieve it of its obligations to deliver mail to every address in the country six days a week and to pay about $5.5 billion a year into a future retirees’ health-care fund -- an expense that accounts for most of the service’s annual losses.

Congress hasn’t acted on proposed legislation to take those steps, leaving just the lame-duck session remaining this year.

If Finley were advising a Postal Service without the constraints it faces, he’d tell it to raise rates, stop charging flat rates to ship a box anywhere in the U.S. and improve customer service at post offices.

William Brandt, chief executive officer of Development Specialists Inc., would end business delivery on Saturdays and residential delivery on Tuesdays. Business mail sits outside empty offices on Saturdays, and Tuesday residential deliveries tend to be mostly advertising mail, he said.

He’d reduce the number of retail locations, as banks have, and find ways to make money on being the only business or government entity to visit all U.S. addresses most days of the week.

Early Retirement

Last year, the service pulled back a plan to close as many as 3,700 post offices, some in towns with fewer than 100 residents, amid protests from lawmakers whose districts are affected.

Because it competes with United Parcel Service Inc. (UPS) and FedEx Corp. (FDX) in package delivery, the service is allowed to control prices for those services, so it could reverse the flat- rate pricing around which it’s centered its advertising.

It’s prohibited by law, though, from raising rates by more than inflation for letters and other products where it has a near-monopoly.

Union Contract

In 2011, with mail volume and revenue well past its peak, the service signed a contract with its largest union that prohibits most employees from being fired if the service wants to downsize. The service is now offering its second round of early-retirement incentives, giving as many as 114,000 American Postal Workers Union members $15,000 apiece to retire.

More than 20,000 workers have accepted with time still to go to until the Dec. 3 deadline, David Partenheimer, a Postal Service spokesman, said.

The Postal Service is cutting other costs within its control, such as energy use, and increasing worker productivity by doing its work with fewer people, Donahoe said.

“We look at this as trying to look at the cost issues while at the same time balancing the benefits that people are looking for, that is consistent delivery for customers, affordable prices for customers,” Donahoe said. “From an employee perspective, they’re looking for a safe working environment in terms of ‘do I have a dependable paycheck and retirement.’ ”